What Is A Stock?

23 Mar 2021, 11:14

Most of us do not have a clue what exactly is a stock all about.  Some think of it merely as an instrument which could help us make money when its prices rise. 

But, do you know there are some privileges you are entitled to when you own a stock? Aren’t you curious to know what benefits you can get other than just buying low and selling high?

What is a stock?

Basically, a stock is just like a certificate of ownership that identifies you as a part stakeholder of the company. In layman terms, it means you own a part of the company. The number of shares you own indicate how much of the company as a percentage you own. For example, if you own 1 share of Boeing, it could mean you are 0.000001% owner of the company. Of course, this may not seem much, when you consider the total number of shares in the company.

What are the benefits of owning a stock?

Then, what good is it to you to own these stock? Well, as a shareholder, this gives you the right to receive dividends from the company’s profits, (you are able to generate income without starting your own business). It also gives you the right to vote in shareholding meetings on important issues. Most importantly, the right to sell your shares to someone else. If you acquire more shares, your voting power increases. If you are major shareholder with significant number of shares, you could directly control the company’s strategic direction by appointing its board of directors. 

For most shareholders, however, being able to own majority of the shares is next to impossible. Most of us are most likely minority shareholders. We do not have the power to individually control the company’s management, but we can buy and sell our shares anytime.

The profit or loss you will receive from the transaction is the spread and that is simply the difference between your buying and selling price. Alternatively, we termed them as capital gain. Dividends and capital gains are what most minority shareholders are aiming for. 

Why do companies issue shares?

Many people assume that it is for vanity reasons and to satisfy the company founders’ egos or wealth. They assumed that entrepreneurs have to grow their companies to a certain size before they can file for listing or IPO. The main reason why companies issue shares in the first place is to raise capital from the public in order to reinvest and grow the business. In order to do that, they need a place to issue these shares. That’s where the stock exchange comes in handy. 

What are stock exchanges?

Stock exchanges are basically a marketplace where you can buy and sell shares.  To do so, you need to find a broker who is connected to and has access to the stock exchanges to help you complete your buy and sell transactions. Nowadays, it is easy and convenient for individual investors to place their trades electronically through these brokers via mobile apps or websites.

An important point to take note is that stocks listed on the stock exchange are denoted by their ticker symbol and each individual company has a unique ticker symbol. For example, the ticker symbol for Bank of America is BAC. These ticker symbols are important for you when placing orders and at EmSociety they will be used to identify the companies on our dashboards. 

Different countries would have their own domestic stock exchanges where companies could list and trade their shares. In the USA, you have the New York Stock Exchange (NYSE) or NASDAQ stock exchange which mostly has technology and biotech stocks. These are the 2 stock exchanges which EmSociety primarily engages with.

Other notable stock exchanges are the Hong Kong Stock Exchange, London Stock Exchange or Singapore Stock Exchange. Therefore, before you contemplate buying any stock, remember to check out which exchange they are listed in and ensure that your broker allows you to trade in stocks listed on that particular exchange.

In Summary,

- Stocks are certificates of ownership of a listed company

- Owning a stock entitles you to ownership privileges from the company

- You have to trade a stock through a broker who can transact your orders through the stock exchange

- Stocks deliver the best returns to investors over time